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Eye on Earnings



The quarterly results of the cement producers are out. Vaibhav Agarwal comes up with the top takeaways. UltraTech
Strong: Bound to rerate with earnings rebound

Earnings were largely in line; we do not see any structural negatives. The marginally lower than expected EBITDA was only because of slightly lower volume and recovery in realisation. The focus on cost efficiencies continues, and opex/tonne was down 8 per cent y-o-y, and 1 per cent q-o-q.

The company is only focused on consolidation now. We maintain our rating, PT, and estimates for now, but we see significant potential upside to our target price in the medium term, driven by cement price recovery and UltraTech inching closer to wind up its consolidation.

Top takeaways
The management sounds extremely positive on demand revival. Guidance for demand growth in FY17 is at +7 per cent. Pet coke prices are inching up, and that may hurt in the medium term. However, the company believes that there are no fundamental reasons for the prices of pet coke to move so sharply; hence, a reversal trend may not be ruled out in the near? to medium?term. All efforts are on to consolidate Jaypee?s assets by Q1FY18. Jaypee will be EPS accretive by Q1FY19. The erstwhile Gujarat plant acquisition of Jaypee is now in line with industry standards; similar improvement is seen in the rest of the acquisitions. Capex spends will remain conservative and all energies will remain focussed on consolidating Jaypee. Capex spends will be skewed towards maintenance and environmental capex.

Outlook and valuation: UltraTech has a structural long?term support to its earnings because of its thrust to gain market share through capex and consolidation. We are bound to see price?target upgrades as and when consolidation with Jaypee wraps up; until then, price movement may remain range bound. UltraTech continues to remains the best structural fit in the industry and will gain maximum with improvement in cement prices. We maintain Buy with a price target of Rs 3,700 (unchanged). UltraTech currently trades at ~ $180 EV/tonne and on our price target, it will trade at ~$190 EV/tonne. We maintain target multiple at 15x EV/EBITDA FY18.

Ambuja Cements
Misses on volumes, but better prices in the north help in recovery

Top takeaways

Ambuja?s operating results in Q2CY16 were largely in line with our estimates and beat consensus by 12 per cent, despite the miss on volumes (like its sister concern ACC).

In our opinion, Ambuja has once again played the volume?cut strategy to benefit in terms of realisations (realisations were up 7 per cent q-o-q, and beat all peers). Management interactions suggest that the highest exposure to north India among all peers helped the company. EBITDA/tonne is at Rs 994 (+62 per cent y-o-y; +40 per cent q-o-q), in line with the industry leader, UltraTech, whose blended EBITDA (inclusive of white cement) was at ~Rs 1,012. Cost excellence continues at Ambuja. Opex/tonne lower by 6 per cent y-o-y and q-o-q was flat. We see an upgrade potential here for Ambuja, given that the consolidation with ACC is likely to be through shortly.

For the time being, we maintain our estimates and target multiple of 15x EV/EBITDA. Factoring in consolidation with ACC, with a 10 per cent holding discount, we upgrade price target to Rs 300 (+11per cent; it was Rs 230 earlier).

Key highlights
Ambuja?s performance in Q2 was in line with our expectations and beat consensus by 12 per cent on the operating front. Ambuja has outperformed all peers (ACC and UltraTech) in Q2CY16 on the operating front, largely driven by realisations. While UltraTech delivered a 6 per cent volume growth with flat pricing and ACC delivered a negative volume growth with no impact on pricing, it was only Ambuja that saw a price improvement of 7 per cent q-o-q, with a volume cut. We continue to see no disappointment on costs too. Opex/tonne is down 6 per cent y-o-y; q-o-q was flat (in line with the peer group performance).

Outlook and valuation: For the time being, we maintain our Neutral stance on Ambuja but we do see an upgrade potential here if Ambuja is able to sustain better prices for Q3 and Q4. We also believe consolidation proceedings with ACC will add to the rerating factor as Ambuja would get direct access to ~34 MT of ACC?s capacity. We have valued Ambuja at par with UltraTech (target multiple 15x EV/EBITDA) adding the benefit of consolidation with ACC (with a 10 per cent holding discount). Ambuja will face a tough time initially to protect its consolidated operating parameters and match ACC?s parameters to self, but we believe these issues will be addressed in time. In the initial period, consolidation with ACC will provide Ambuja only the much-awaited capacity rerating factor more than anything else.

Whether efficiencies are matched with the consolidation needs to be seen. On consolidated capacity, Ambuja will trade at ~ $175/tonne on our price target, which is ~10 per cent discount to our target valuations for the industry leader UltraTech.

Disappointing Q2 after a good Q1
Top takeaways from Q2CY16

Volume growth was a key disappointment. Negative volume growth in a scenario where peer growth was 6 per cent is unjustifiable. Operating margin is 1.3 per cent lower versus our expectation, largely due to no volume growth due to lack of focus in adding capacities. Operational efficiencies have sustained; realisation trend appears in line with peers. Near-term positive triggers are present -consolidation with Ambuja and commissioning of the Jamul expansion- but we see all the positives largely factored in. Despite upgrading the target multiple to 14x CY17 EV/EBITDA (12x earlier), and even after considering the benefits of consolidation with Ambuja, we see no upside. We maintain Sell with a revised price target of Rs 1,430 (Rs 1,230 earlier). The only potential trigger would be a recovery in cement prices.

Outlook and valuation: We maintain our Sell rating on ACC. The Jamul commissioning will be a near-term saviour and consolidation with Ambuja will bring in further focus by its parent to improve the cost structure here. The only possible incremental rerating factor for ACC would be a recovery in cement prices. Sustainability of cost savings, though, is a must. Despite upgrading the target multiple to 14x (12x earlier), we do not see any upside here. At target, the stock will trade at ~ $125/tonne ($145/tonne currently). Upgrade potential does exist, but that may not happen before we factor in CY18 earnings.

Shree Cement
Realigns price strategy – a much needed rerating trigger for the sector

Top takeaways from Q1 The much-awaited price strategy realignment is here. The 16 per cent q-o-q realisation jump is huge (inclusive of subsidies of ~Rs 350 million). Given that peer realisations have grown 7-9 per cent, Shree Cement has realigned its pricing strategy and bridged its realisation gap with peers. In our opinion, this is good news for the sector. Resultantly, EBITDA is 28 per cent/19 per cent higher than our/consensus estimates. We have raised our realisation estimates for FY17 by 6 per cent and hence upped our earnings estimates.

Volume growth at 19 per cent y-o-y, though lower than estimated, is still robust (-4 per cent q-o-q; -5 per cent versus our estimates). However, the volume sacrifice has paid off well. In several notes in the past, we have said that Shree Cement has unparalleled competitive advantages, which would lead to a valuations rerating if it revisits its price strategy and this has happened in Q1FY17. The key will be to sustain this strategy. If it continues to deliver no negative surprise, the stock may still further re-rate marginally. It currently trades at ~ $280/tonne (~2x replacement), the richest valuation in the sector, and may potentially touch $300-330/tonne.

Outlook and valuation
Given rich valuations of $280 EV/tonne (~2x replacement cost), the stock will remain range-bound. However, we expect limited rerating to $300-330/tonne if Shree Cement delivers no negative surprises to its price strategy.

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Price hikes, drop in input costs help cement industry to post positive margins: Care Ratings




Region-wise,the southern region comprises 35% of the total cement capacity, followed by thenorthern, eastern, western and central region comprising 20%, 18%, 14% and 13%of the capacity, respectively.

The cement industry is expected to post positive margins on decent price hikes over the months, falling raw material prices and marked drop in overall production costs, said an analysis of Care Ratings.

Wholesale and retail prices of cement have increased 11.9% and 12.4%, respectively, in the current financial year. As whole prices have remained elevated in most of the markets in the months of FY20, against the corresponding period of the previous year.

Similarly, electricity and fuel cost have declined 11.9% during 9M FY20 due to drop in crude oil prices. Logistics costs, the biggest cost for cement industry, has also dropped 7.7% (selling and distribution) as the Railways extended the benefit of exemption from busy season surcharge. Moreover, the cost of raw materials, too, declined 5.1% given the price of limestone had fallen 11.3% in the same aforementioned period, the analysis said.

According to Care Ratings, though the overall sales revenue has increased only 1.3%, against 16% growth in the year-ago period, the overall expenditure has declined 3.2% which has benefited the industry largely given the moderation in sales.

Even though FY20 has been subdued in terms of production and demand, the fall in cost of production has still supported the cement industry by clocking in positive margins, the rating agency said.

Cement demand is closely linked to the overall economic growth, particularly the housing and infrastructure sector. The cement sector will be seeing a sharp growth in volumes mainly due to increasing demand from affordable housing and other government infrastructure projects like roads, metros, airports, irrigation.

The government’s newly introduced National Infrastructure Pipeline (NIP), with its target of becoming a $5-trillion economy by 2025, is a detailed road map focused on economic revival through infrastructure development.

The NIP covers a gamut of sectors; rural and urban infrastructure and entails investments of Rs.102 lakh crore to be undertaken by the central government, state governments and the private sector. Of the total projects of the NIP, 42% are under implementation while 19% are under development, 31% are at the conceptual stage and 8% are yet to be classified.

The sectors that will be of focus will be roads, railways, power (renewable and conventional), irrigation and urban infrastructure. These sectors together account for 79% of the proposed investments in six years to 2025. Given the government’s thrust on infrastructure creation, it is likely to benefit the cement industry going forward.

Similarly, the Pradhan Mantri Awaas Yojana, aimed at providing affordable housing, will be a strong driver to lift cement demand. Prices have started correcting Q4 FY20 onwards due to revival in demand of the commodity, the agency said in its analysis.

Industry’s sales revenue has grown at a CAGR of 7.3% during FY15-19 but has grown only 1.3% in the current financial year. Tepid demand throughout the country in the first half of the year has led to the contraction of sales revenue. Fall in the total expenditure of cement firms had aided in improving the operating profit and net profit margins of the industry (OPM was 15.2 during 9M FY19 and NPM was 3.1 during 9M FY19). Interest coverage ratio, too, has improved on an overall basis (ICR was 3.3 during 9M FY19).

According to Cement Manufacturers Association, India accounts for over 8% of the overall global installed capacity. Region-wise, the southern region comprises 35% of the total cement capacity, followed by the northern, eastern, western and central region comprising 20%, 18%, 14% and 13% of the capacity, respectively.

Installed capacity of domestic cement makers has increased at a CAGR of 4.9% during FY16-20. Manufacturers have been able to maintain a capacity utilisation rate above 65% in the past quinquennium. In the current financial year due to the prolonged rains in many parts of the country, the capacity utilisation rate has fallen from 70% during FY19 to 66% currently (YTD).

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Wonder Cement shows journey of cement with new campaign




The campaign also marks Wonder Cement being the first ever cement brand to enter the world of IGTV…


Cement manufacturing company Wonder Cement, has announced the launch of a digital campaign ‘Har Raah Mein Wonder Hai’. The campaign has been designed specifically to run on platforms such as Instagram, Facebook and YouTube.

#HarRaahMeinWonderHai is a one-minute video, designed and conceptualised by its digital media partner Triature Digital Marketing and Technologies Pvt Ltd. The entire journey of the cement brand from leaving the factory, going through various weather conditions and witnessing the beauty of nature and wonders through the way until it reaches the destination i.e., to the consumer is very intriguing and the brand has tried to showcase the same with the film.

Sanjay Joshi, executive director, Wonder Cement, said, "Cement as a product poses a unique marketing challenge. Most consumers will build their homes once and therefore buy cement once in a lifetime. It is critical for a cement company to connect with their consumers emotionally. As a part of our communication strategy, it is our endeavor to reach out to a large audience of this country through digital. Wonder Cement always a pioneer in digital, with the launch of our IGTV campaign #HarRahMeinWonderHai, is the first brand in the cement category to venture into this space. Through this campaign, we have captured the emotional journey of a cement bag through its own perspective and depicted what it takes to lay the foundation of one’s dreams and turn them into reality."

The story begins with a family performing the bhoomi poojan of their new plot. It is the place where they are investing their life-long earnings; and planning to build a dream house for the family and children. The family believes in the tradition of having a ‘perfect shuruaat’ (perfect beginning) for their future dream house. The video later highlights the process of construction and in sequence it is emphasising the value of ‘Perfect Shuruaat’ through the eyes of a cement bag.

Tarun Singh Chauhan, management advisor and brand consultant, Wonder Cement, said, "Our objective with this campaign was to show that the cement produced at the Wonder Cement plant speaks for itself, its quality, trust and most of all perfection. The only way this was possible was to take the perspective of a cement bag and showing its journey of perfection from beginning till the end."

According to the company, the campaign also marks Wonder Cement being the first ever cement brand to enter the world of IGTV. No other brand in this category has created content specific to the platform.

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In spite of company’s optimism, demand weakness in cement is seen in the 4% y-o-y drop in sales volume. (Reuters)




Cost cuts and better realizations save? the ?day ?for ?UltraTech Cement, Updated: 27 Jan 2020, Vatsala Kamat from Live Mint

Lower cost of energy and logistics helped Ebitda per tonne rise by about 29% in Q3
Premiumization of acquired brands, synergistic?operations hold promise for future profit growth Topics

UltraTech Cement
India’s largest cement producer UltraTech Cement Ltd turned out a bittersweet show in the December quarter. A sharp drop in fuel costs and higher realizations helped drive profit growth. But the inherent demand weakness was evident in the sales volumes drop during the quarter.

Better realizations during the December quarter, in spite of the 4% year-on-year volume decline, minimized the pain. Net stand-alone revenue fell by 2.6% to ?9,981.8 crore.

But as pointed out earlier, lower costs on most fronts helped profitability. The chart alongside shows the sharp drop in energy costs led by lower petcoke prices, lower fuel consumption and higher use of green power. Logistics costs, too, fell due to lower railway freight charges and synergies from the acquired assets. These savings helped offset the increase in raw material costs.

The upshot: Q3 Ebitda (earnings before interest, tax, depreciation and amortization) of about ?990 per tonne was 29% higher from a year ago. The jump in profit on a per tonne basis was more or less along expected lines, given the increase in realizations. "Besides, the reduction in net debt by about ?2,000 crore is a key positive," said Binod Modi, analyst at Reliance Securities Ltd.

Graphic by Santosh Sharma/Mint
What also impressed analysts is the nimble-footed integration of the recently merged cement assets of Nathdwara and Century, which was a concern on the Street.

Kunal Shah, analyst (institutional equities) at Yes Securities (India) Ltd, said: "The company has proved its ability of asset integration. Century’s cement assets were ramped up to 79% capacity utilization in December, even as they operated Nathdwara generating an Ebitda of ?1,500 per tonne."

Looks like the demand weakness mirrored in weak sales during the quarter was masked by the deft integration and synergies derived from these acquired assets. This drove UltraTech’s stock up by 2.6% to ?4,643 after the Q3 results were declared on Friday.

Brand transition from Century to UltraTech, which is 55% complete, is likely to touch 80% by September 2020. A report by Jefferies India Pvt. Ltd highlights that the Ebitda per tonne for premium brands is about ?5-10 higher per bag than the average (A cement bag weighs 50kg). Of course, with competition increasing in the arena, it remains to be seen how brand premiumization in the cement industry will pan out. UltraTech Cement scores well among peers here.

However, there are road bumps ahead for the cement sector and for UltraTech. Falling gross domestic product growth, fiscal slippages and lower budgetary allocation to infrastructure sector are making industry houses jittery on growth. Although UltraTech’s management is confident that cement demand is looking up, sustainability and pricing power remains a worry for the near term.

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